Corporate tax competition

The Confederation of Danish Industries (DI) is urging the Danish government to cut corporate taxes from the current 25% in order to maintain Danish competitiveness. This recommendation comes after the new German government announced it plans to cut corporate taxes by half, from 30% to 15%.

Deputy Director General of the DI, Tine Roed, argues that because Germany is Denmark’s largest trading partner, a lot of Danish companies would be tempted to move their businesses south of the border. This is compounded by the new “green taxes” imposed upon Danish industries together with the indications that the opposition would raise taxes if in power.

The British government should carefully follow the actions of the new German government. Unfortunately the UK has put itself in a position where it is not able to act this decisively because of the already extended public borrowing: about 12 percent of GDP this year. Germany’s deficit on the other hand only accounts for about 5 % of GDP this year, thus leaving more room for the German government to act on changes in the global economy.

As Jeremy Warner pointed out in The Daily Telegraph, the UK is in a situation where tax cuts are not likely. As a short term measure, Mr Warner suggests a dual action of tax raises and expenditure cuts. Why, you may ask is suggesting we raise taxes? Because: “spending cuts take time to implement and sometimes involve substantial upfront costs”. The ideas is that a shorter period of higher taxes might increase government revenue, taking us out of the debt spiral quicker, followed by tax cuts so the economy is not too adversely damaged.

However, given where we are on the Laffer curve, the government might not have Warner’s luxury of extorting more revenue with a quick tax rise, and more worryingly, governments are rarely keen on cutting taxes once they have been instituted.